BEPS – Historic Reforms
The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project is changing the international tax landscape by building a new international consensus on how to tackle BEPS. In September 2014, the first seven of the deliverables under the 15-point BEPS Action Plan were presented to G20 Finance Ministers when they met in Cairns and were endorsed by the G20 Leaders in Brisbane in November.
By the end of 2015, a full package of the BEPS measures will be concluded. Implemented by governments, the measures will address the loopholes that facilitate BEPS, while promoting more effective ways to address double taxation.
Action is critical, as without consensus based reform to the international tax rules, the response to increasing double non-taxation will be a multitude of unilateral measures, increasing and complicating the compliance obligations for business. By establishing a level playing field for business without unnecessary compliance costs for industry or governments, the BEPS Project will foster more resilient and sustainable growth.
The BEPS Project brings together 62 countries, including all G20 and OECD members and a regional balance of low and middle income countries. By working with key stakeholders, including significant input from business, these countries are ensuring the BEPS measures establish a strong, consensus-based foundation, built on transparency, which will promote coherence and certainty in the international tax system.
Some key solutions to BEPS issues were identified in the seven reports published in September, and in February details on how three of those measures will be implemented were presented to the G20 Finance Ministers at their meeting in Istanbul.
Country by Country Reporting
Country by country reporting formed part of the package of transfer pricing documentation (BEPS Action 13) published in September. The Country by Country report requires multinationals to provide tax administrations with key information for each jurisdiction in which they operate – for example, revenues, profits, taxes accrued and paid as well as activity indicators.
The guidance issued in February 2015 confirmed that all multinationals with a turnover above €750 million will be required to prepare Country by Country reports, to be filed in the country of residence of the multinational’s ultimate parent entity. To protect confidentiality and safeguard the proper use of the information, the reports will be exchanged between relevant tax administrations through a government to government mechanism such as a tax treaty.
Harmful Tax Practices
Harmful tax practices were addressed in BEPS Action 5. Building on the interim report issued in September, countries have now settled on an agreed ‘nexus’ approach to determining whether preferential treatment for intellectual property (IP or ‘patent box’ regimes) was harmful or not.
Tax Treaties
A multilateral instrument to address the tax treaty-related BEPS measures was addressed in Action 15. After the agreement announced in September on the feasibility, and desirability, of establishing a multilateral instrument capable of updating the existing network of over 3,000 bilateral tax treaties, countries have now approved a mandate for the negotiation of that instrument. The multilateral instrument will streamline and expedite the implementation of tax treaty-related BEPS measures in a cost effective manner, and negotiations will commence in the coming months.
Additional Measures
The 2014 deliverables published in September also covered measures which will ensure that hybrid mismatches can be neutralised (Action 2); treaty shopping and other forms of treaty abuse will be addressed (Action 6); and abuse of transfer pricing rules in the key area of intangibles will be minimised (Action 8).
Critically, the Project has also taken a close look at the tax challenges raised by the digital economy, and how best to address them. Acknowledging that today the digital economy is so pervasive that it cannot be ring-fenced, the report published in September (Action 1) outlines a common understanding of the digital economy that will ensure its relevant features are taken into account in the work on the other BEPS Actions.
Business is watching the BEPS Project closely, and is also playing an active role in the development of the measures, as part of broader efforts to ensure the outcomes are appropriately nuanced and effective. More than 4,000 pages of comments have been received on the discussion drafts released to date, the OECD has held nine public consultations and hosted six live webcasts watched by 30,000 people so far.
Improving the dispute resolution mechanism (Action 14) to address instances where taxpayers are subject to double taxation as a result of overlaps in national tax systems is an important component of the measures that will be addressed in the final package. The other remaining BEPS measures include further work on transfer pricing (Actions 8-10), the rules on controlled foreign corporations (Action 3) and interest deductibility (Action 4), the artificial avoidance of permanent establishment status (Action 7), requirements to disclose aggressive tax planning arrangements (Action 12) and developing indicators and tools to measure the economic scale and impact of BEPS and BEPS countermeasures (Action 11).
Conclusion
The package of BEPS measures will be concluded by the end of 2015. Once implemented by governments, the measures will close the loopholes and neutralise mismatches that facilitate the separation of corporate profits from the location where the value is created and the economic activities take place. They will also reduce double taxation and establish a level playing field for business without unnecessary compliance costs. The BEPS measures will be presented to the G20 Leaders at their summit in November and will mark a historic reform of the international tax rules.
